Insurers are warned to prepare for hurricane season

Risk managers and insurance companies should consistently employ robust enterprise risk management strategies and business continuity programs, particularly important as the start of the 2008 Atlantic hurricane season approaches and leading forecasters expect this year will be an active one for hurricane and tropical storm formation, Aon Corp. (NYSE: AOC) said the other day. The National Oceanic and Atmospheric Administration’s (NOAA)on 22 May updated forecast calls for 12 to 16 named storms between 1 June and 30 November. Other major forecasting organizations also believe conditions are ripe for an active storm season. “While predictions of hurricane activity are important, insurance and reinsurance buyers must remember that any storm can cause massive destruction, whether that storm occurs in a season of above-normal activity or below-normal activity,” said Steven Drews, lead meteorologist and associate vice president of Impact Forecasting LLC, a unit of Aon Re Global. “Hurricane Andrew in 1992 and hurricanes Dean and Felix in 2007 each caused massive destruction — during periods of relatively light activity.”

The low severity of property catastrophe losses since 2006 — resulting in part from the relatively small number of landfalling hurricanes and tropical storms in the last two years — is one driver of what Aon Re Global expects will be favorable pricing for traditional property catastrophe reinsurance programs for insurers’ mid-year renewals. A recent Aon Re Global study of insurance company stock price reaction to 2005 hurricanes Katrina, Rita and Wilma found that insurance company stock prices were more sensitive to a single large loss (that is, Hurricane Katrina alone) than to an aggregation of loss events (that is, Katrina, Rita, and Wilma combined). The Aon Re study underscored the view that insurance companies can best drive shareholder value by consistently managing the enterprise risks facing their businesses. Ceding risks through the reinsurance markets is one method of doing so. Managing enterprise risks should also be a strategic priority for those risk managers and finance professionals responsible for risk management. A second Aon study — this one released in late 2007 by Aon Global Risk Consulting — found that only one in ten of the companies surveyed had developed a fully integrated enterprise risk management strategy.

Before storms reach land, it’s critical that organizations have plans to protect employees and property, and have an understanding of what losses are covered under existing policies. Understanding whether policies have a wind deductible, and knowing how a policy will respond in the event of a loss or damages to real property, contents and business income are among the steps insurance buyers should take with a broker before a major storm event, according to Al Tobin, managing director and leader of Aon’s property practice. “We advise our clients to focus on how best to protect their people, property and data, as well as the ability to communicate,” Tobin said. “Also, we urge clients to procure generators, temporary employee housing and restoration services before or early in the hurricane season, as such services are often difficult to get after a storm hits.” Mitigating business interruption is key to preparing for tropical storm and hurricane risks and preventing a company or organization from losing evenue. “Organizations may become complacent in their loss-mitigation planning if they haven’t experienced a property loss in some time,” said Arnold Mascali, president of Aon Horizon and Aon Global Rapid Response. “Such complacency can leave them vulnerable to significant losses if catastrophes strike their facilities while they’re not adequately prepared.”

Interest in Rapid Response more than doubled in the first quarter of 2008 versus the same period in 2007, underscoring increased attention among insurance buyers to proactive risk management and business continuity planning.

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